If we want to find a stock that could multiply over the long term, what underlying trends should we be looking for? A common approach is to find a company with increasing returns on capital employed (ROCE) coupled with growing capital employed. Basically, this means that a company has profitable initiatives that it can continue to reinvest in, which is a characteristic of a compounding machine. Against this background, the ROCE is Herbalife diet (NYSE: HLF) looks attractive right now, so let’s see what the trend in yields can tell us.
Understanding return on investment (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its rate of return) in relation to the company’s capital. The formula for this calculation by Herbalife Nutrition is:
Return on capital employed = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.43 = $ 816 million ÷ ($ 3.0 billion – $ 1.1 billion) (based on the last twelve months through June 2021).
Because of this, Herbalife Nutrition has a ROCE of 43%. That’s a fantastic return and not only surpasses the 17% average that companies in a similar industry earn.
Check out our latest analysis for Herbalife Nutrition
NYSE: HLF Return on Capital Employed August 29, 2021
In the graph above, we measured Herbalife Nutrition’s past ROCE versus its past performance, but arguably the future is more important. If you are interested, you can read the analyst forecasts in our for free Report on analyst forecast for the company.
How is Herbalife Nutrition’s ROCE developing?
In terms of Herbalife Nutrition’s ROCE history, it’s pretty impressive. The company has earned 43% consistently over the past five years, and the company’s capital has increased 62% over that time. Such returns will be the envy of most companies, and since they have been repeatedly reinvested at these prices, that’s all the better. You can see this when you look at well-run companies or cheap business models.
One more note: even if the ROCE has remained relatively constant over the past five years, the reduction in short-term liabilities to 37% of total assets is pleasing from the entrepreneur’s point of view. In fact, suppliers are now funding less of the business, which can reduce some elements of risk.
The key to take away
In short, we would argue that Herbalife Nutrition has what it takes to be a multi-excavator as it is able to add to its capital at very profitable returns. So it’s not surprising that shareholders have achieved a respectable 70% return if held for the past five years. While the stock is “more expensive” than before, we think the strong fundamentals warrant this stock for further investigation.
If you want to research further into Herbalife Nutrition, you may be interested in that 2 warning signs which our analysis found out.
If you want to look for more stocks that have made high returns, check this out for free List of stocks with solid balance sheets that also generate high returns on equity.
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This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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